The present invention relates to a system and method for enabling buyers and sellers of goods to transact with each other. More particularly, the present invention provides the transactional capability to buyers of goods to have open account trade credit with a plurality of sellers and provides sellers of goods with improved risk assessment and decreased credit costs for buyers of the goods.
Corporate procurement processes involving relatively low value purchases, generally defined as less than $25,000, represent a significant percentage of corporate procurement transactions. The processing of such low value transactions, however, is plagued by timely and costly processing of paper requests for quotations (RFQs), purchase orders (POs), invoices and payments.
In corporate to corporate transactions between major trading partners, such as two large corporations well-known to each other, the practice of the selling party providing credit, or trade terms, to the buyer, is firmly embedded in tradition and creates strong relationships between such major trading partners. The same practice, however, creates significant problems where the buying party is not a major trading partner, but is a buyer heretofore unknown to the seller.
The selling party in such a transaction may be unwilling to commit marketing resources to seek and/or close transactions with these anonymous buyers. The selling party also may be reluctant to absorb the cost of analyzing and approving credit exposure, as well as the cost of absorbing credit losses. The expenses associated with expending marketing resources and making informed credit decisions may keep many corporations from exploiting the large but relatively unknown and unpredictable universe of small buyers. The selling corporation must also contend with the problem of collecting payment from numerous small buyers.
In practice, corporate sellers must expend significant resources to make appropriate credit decisions with regard to their minor trading partners.
The above arrangement poses problems for the minor trading partner/buyer as well. The buyer, for example, is often faced with limited access to new vendors and encounters delays in effecting purchases. Moreover, if a vendor to whom the buyer is unknown is unwilling to extend trade credit, the buyer must go through the complex and time-consuming task of obtaining third-party financing (e.g., through a letter of credit, working capital loan or other means) to effect its purchase. However, these methods require negotiations with a lender, usually a bank or a finance company, and carry high transaction-costs. They are therefore inappropriate or uneconomical for small to midsize purchases. As a result, many purchases are made from xe2x80x9cthe usualxe2x80x9d vendor, not from a new but unknown vendor who may actually be the most efficient supplier.
As mentioned earlier, in corporate to corporate procurement transactions, it is customary for the transaction to involve some form of credit. This credit, often referred to as xe2x80x9copen account trade credit,xe2x80x9d is provided by the seller, generally at no charge to the buyer, for a set period of time, normally 30 days. Buyers generally do not explicitly pay for the receipt of open account trade credit and consider this free credit part of the established seller/buyer relationship.
In addition to open account credit terms offered by the selling party, there are several other types of commercial credit options. One option for relatively small purchases is a commercial credit card. Credit cards operate by having the institution issuing the credit card, the merchant bank, provide the cardholder with a revolving line of credit that can be used to buy goods from sellers who accept the credit card. The revolving line of credit allows the cardholder to pay for credit card purchases over a period of time at an interest rate set by the merchant bank. For example, VISA(copyright) and MASTERCARD(copyright) Bankcard Association cards represent typical consumer credit cards offering a revolving line of credit.
Once a buyer makes a purchase with the credit card, the seller is paid by the merchant bank, less a predetermined service fee, often referred to as an xe2x80x9cinterchange fee,xe2x80x9d and the merchant bank then invoices the buyer for payment. As an example of a typical commercial credit card transaction, if a cardholder makes a $1,000 purchase, the merchant bank then pays the seller $1,000 less the amount of the interchange fee. For example, if the issuing institution charges a 2% interchange fee, then the seller would be paid $980, with $20 remaining with the merchant bank, the interchange fee usually being shared with the Bankcard Association.
Another type of commercial credit option is a travel and entertainment card. An example of a consumer travel and entertainment card would be an AMERICAN EXPRESS(copyright) card or DINERS CLUB(copyright) card. Unlike a credit card, a travel and entertainment card is considered open-ended credit with payment in full due at the time of billing; it does not extend a revolving credit line to the buyer/cardholder. A seller paid by a travel and entertainment card receives the amount of the transaction less a predetermined discount fee, in a manner similar to payment received from a credit card purchase. Often, however, the discount rate for a travel and entertainment card is higher than the discount fee for a credit card because travel and entertainment cards are not finance charge driven.
Credit cards and travel and entertainment cards provide a uniform level of risk assessment to the seller; the seller pays a predetermined interchange fee regardless of the actual credit risk presented by the buyer. Thus, the seller does not receive risked-based pricing from the card-issuing institution representative of the actual credit risk presented by the individual buyer. In addition, credit cards and travel and entertainment cards generally bill cardholders on a regular basis, e.g. monthly, as opposed to invoice billing that is often preferred in commercial transactions.
An emerging area in commercial transactions is electronic communication of financial transactions. Technological advances in computer networks and communication systems have been applied to processing of purchase and credit transactions. Applications of computer technology to financial transactions include Electronic Data Interchange (EDI). EDI provides a standardized format for the communication of business documents between the computers of two companies. Through the use of EDI, a vendor may electronically receive purchase orders directly into an accounting system and transmit invoices back to the vendor. EDI is used by a variety of businesses including manufacturing companies, wholesale and retail trade companies and financial institutions.
Another application of improved computer technology to commercial transactions is the emergence of electronic commerce. Electronic commerce includes the use of electronic networks as electronic marketplaces for business to business or consumer transactions. Electronic commerce services can include electronic brokerages, distributorships or clearinghouses that facilitate trade via electronic interchange media such as a public network (e.g., the Internet), or proprietary access networks. For example, electronic commerce services can include catalog services utilizing electronic networks such as EDI systems, electronic mail and telephone/facsimile connections, as well as CD-ROM technology. Electronic commerce services often operate in real-time and can help reduce distribution costs and help sellers reach new markets.
Electronic commerce generally does not, however, offer financial services to the seller such as payment, settlement, credit assessments of buyers, and collection services. Whereas credit cards are being adapted for consumer electronic commerce, they have not specifically addressed the needs of business to business electronic commerce. Thus, there are no current systems for processing low value corporate to corporate transactions which handle all aspects of the transaction including electronic brokerage, risk management and electronic payment, and also provide risk assessment of buyers tailored to the credit risk presented by individual buyers. Finally, xe2x80x9csmart purchasingxe2x80x9d via electronic commerce, by which buyers and sellers can structure the most efficient transactions by searching electronically for the best available counterparty, is defeated by the need to rely on traditional techniques for credit analysis and payment before a transaction can be consummated.
In accordance with a first embodiment of the present invention, a system provides transactional services among sellers and buyers having no previous relationship with each other. The system includes a financial clearinghouse for receiving a registration application for registering buyers with the financial clearinghouse and also for receiving a request for goods or services from the buyers via a computer network or other electronic medium. The financial clearinghouse makes a dynamic real-time risk classification of each buyer utilizing an on-line repository of credit data, including either in-house data or data obtained from a commercial credit service. The financial clearinghouse further determines a risk-based discount rate as a function of the buyer""s risk classification to establish a payment amount to a seller by the clearinghouse. The financial clearinghouse also determines a credit line for each buyer.
If the buyer""s risk classification is acceptable, the clearinghouse provides a preliminary authorization for a proposed purchase by the buyer and transmits a request for quotation for the desired goods or services, along with the discount rate, to the seller or sellers who are electronically coupled to the financial clearinghouse via the computer network. The financial clearinghouse then receives price quotes from sellers responding to the request. The buyer may then choose to place an order from a particular seller or sellers, for example, by selecting the seller with the lowest price. The financial clearinghouse determines a final credit authorization for the amount of the transaction and then the selected seller or sellers are electronically notified of the buyer""s order by the financial clearinghouse. After the seller provides a notice of shipment of the goods, the financial clearinghouse transmits the payment amount to the seller, net of the discount, and also transmits an invoice to the buyer for the purchase price of the transaction.
In accordance with a second embodiment of the present invention, the financial clearinghouse, the buyer and the sellers are coupled to a broker, implemented, for example, as a computer system, which provides an on-line quote and order processing service. In accordance with the second embodiment, the financial clearinghouse can receive a registration application either directly from a potential buyer or via the broker which receives the registration application from the buyer and transmits the application to the financial clearinghouse for registering the buyer with the clearinghouse. Once the registration application is accepted by the financial clearinghouse, the broker can receive a request for goods or services from the buyer. As in the first embodiment of the present invention, the financial clearinghouse, in the processing of the buyer""s registration application, utilizes an on-line repository of credit data to determine a risk classification for the buyer. The clearinghouse also determines a credit line for the buyer and a risk-based discount rate as a function of the buyer""s risk classification to establish a payment amount to a seller from the clearinghouse if the buyer eventually places an order.
According to the second embodiment of the present invention, once the broker receives a request for goods or services from a buyer, the broker requests a preliminary authorization of the transaction from the financial clearinghouse. If the risk rating of the buyer is acceptable to the financial clearinghouse, the clearinghouse provides an approval message to the broker and the broker transmits the request for the desired goods, along with the discount rate, to the seller or sellers who are electronically coupled to the broker. The broker then receives price quotes from sellers responding to the request and transmits the quotes to the buyer. The buyer may then choose to place an order from a particular seller or sellers, for example, by selecting the seller with the lowest price. The broker submits the buyer""s order to the financial clearinghouse for final credit approval. Upon final credit approval by the financial clearinghouse, the clearinghouse notifies the broker and the broker, in turn, notifies the selected seller or sellers to complete the buyer""s order. After the seller provides a notice of shipment of the goods, the financial clearinghouse transmits the payment amount, less a discount fee, to the seller and also transmits an invoice to the buyer for the purchase price of the transaction.
The system and method according to the present invention facilitates corporate to corporate trade by providing on-line electronic trade brokerage, credit risk management and electronic payment and collection services which supports an emerging class of electronic intermediaries in wholesale commerce, referred to as electronic commerce services. The credit risk management feature of the present invention provides a dynamic risk evaluation system for obtaining on-the-fly credit evaluations of buyers to facilitate automated ordering and processing of goods, including risk-based pricing for sellers.
The system and method according to-the present invention benefits sellers by providing risk-based pricing, reducing administrative expenses such as credit department, receivables management, and collection expenses, reducing the credit risk normally associated with small buyers, providing rapid payment to the seller and thereby reducing the seller""s working capital requirement, and, by servicing a large number of buyers, enabling the seller to tap into new markets.
The system and method according to the present invention benefits buyers by eliminating frustrating and costly delays associated with purchasing from new or occasional sellers, allowing buyers to price shop among sellers via electronic commerce for an optimal price and selection of goods without needing a prior business relationship or to establish separate credit facilities for each seller, reducing the buyer""s administrative expenses in submitting RFQs, POs, reconciling invoices and making payments, and providing invoice billing.
The present invention accomplishes these and other objectives by providing a system for electronically: establishing credit approval and an accompanying credit line for the purchase of the desired goods based on a dynamic risk classification of the buyer (which credit line can be used with any participating seller); placing a request for the purchase of goods; placing a purchase order for the goods, the shipment of which triggers payment to the seller of the goods from a financial clearinghouse for the amount of the transaction less a discount fee utilizing risk-based pricing; and invoicing the buyer for payment of the purchase price of the goods by the clearinghouse.